In their U.S. equity strategy note Monday, Morgan Stanley analysts told investors that they believe "risks for a major correction have rarely been higher."
"In our view, the headwinds significantly outweigh the tailwinds," wrote analysts. "Our highest conviction view remains our well below consensus forecast for earnings this year—our base case 2023 EPS for S&P 500 is $185 (Bear $170/Bull $210) which compares to bottom-up consensus at $220 and top-down/buyside forecasts near $210-215."
"While last year's earnings misses were mostly a function of bloated cost structures as pandemic demand normalized, we believe the next leg will be about deteriorating pricing and top line disappointment," they added.
In addition to growth risks, analysts explained that the liquidity picture is starting to deteriorate due to record levels of Treasury issuance and QT, with Morgan Stanley estimating bank reserves will contract by $500 billion to $800 billion over the next six months which they see as likely having a negative impact on equity valuations.
"The technical picture remains poor with recent breadth improvement failing yet again," analysts continued.
They concluded that the firm believes value is likely to have a period of relative outperformance versus growth as "defensives reassert their leadership from last year."